4.12.3.35 Life Interests & Remainder Interests

Date of effect

This topic has effect to life interests and remainder interests held in trusts from 1 January 2002.

Summary

This topic contains information on the following:

  • the assessment of life interests, and
  • the assessment of remainder interests.

Life interests

A life interest is an exempt asset unless included in one of the exceptions under SSAct section 1118(1)(c). A life interest does not form part of a trust. A life interest that is granted to a person under a will that also establishes a testamentary trust is not an asset of the testamentary trust but rather is an asset of the person to whom the life interest is granted. For further information on the assessment of life interests, please refer to 4.6.2.10.

Remainder interests

A remainder interest is an exempt asset unless included in one of the exceptions under SSAct section 1118(1)(h). A remainder interest is generally established when a life interest is created; the remainder interest is the future right the person (or entity) has to an asset while the holder of the life interest is alive and the life interest has not been forgone.

Remainder interests that do not form part of a trust

On rare occasions a remainder interest may NOT form part of a trust. If an income support recipient creates a life interest via their will and provides in that will for the remainder interest to go directly to a third party without creating a trust, the remainder interest will not form part of a trust. In this case, the remainder interest is assessed under the general social security means test rules and the trusts and companies rules do not come into play. The remainder interest in this instance is exempt unless it meets one of the exceptions under SSAct section 1118(1)(h).

Example: John's will creates a life interest in the farmland he owned to his partner Molly, with the farm to go to their child Lex on Molly's death. John's will states 'I give a life interest in the farmland to my partner Molly, and the remainder interest in the farmland to my child Lex'. In this case, John's will allows 2 titles to be created in the farmland, one in relation to the life interest granted (to Molly) and one in relation to the remainder interest granted (to Lex). Both these interests are saleable and no trust is created.

However, John's will might instead state 'I give a life interest in the farmland to my partner Molly, and once Molly has passed away I give the farmland to those children of mine who are alive at that time'. In this case, no present entitlement exists in the remainder interest in the farmland for Lex and any other children of John until Molly has passed away, so the remainder interest is held as part of a trust which will be assessable under the trusts and companies rules.

Remainder interests that form part of a trust, established post 31/3/2001

A remainder interest may form part of a trust, especially if the remainder interest is established by a will that also creates a testamentary trust. If a remainder interest is part of a trust, it is an asset of that trust and may be assessable against the controller of the trust, unless it is an exempt asset for that controller. To determine the value of a remainder interest, an actuarial valuation is required.

Example: Jennifer (68) is the beneficiary of Reg's (her late partner's) will. Reg left Jennifer a life interest in a $300,000 investment property, which the actuary has valued at $95,000. Reg and Jennifer have one child, Sharon, who is to receive the $300,000 investment property absolutely on Jennifer's death. Sharon therefore has a conditional interest in this property that will be realised on Jennifer's death.

The remainder interest that remains in the trust until Jennifer's death has a value determined by the actuary to be $180,000. This remainder interest is contained within the testamentary trust and may be attributed to the controller of the trust, depending on who the controller is. If the controller is Jennifer, she will be attributed with the remainder interest. If the controller of the trust is Sharon, however, Sharon will not be attributed with the value of the remainder interest as it is an exempt asset for Sharon, being created by someone other than Sharon or Sharon's partner.

Remainder interests that form part of a trust, established pre 31/3/2001

If an income support recipient is the controller of a trust containing a remainder interest, and this trust was activated prior to 31 March 2001, the income support recipient will not be attributed with the remainder interest even though they are the controller of the trust. This concession was considered appropriate to allow income support recipients time to rearrange their financial affairs, and to avoid attribution to those who could not alter the arrangements surrounding their interest in a testamentary trust.

Example: David had established a testamentary trust and life interest as part of his will to allow his partner, Winifred, to use an investment property for the remainder of her life (i.e. Winifred has a life interest in this investment property), and on Winifred's death this property will pass beneficially to the couple's child, Geoff. David passed away in August 2000, leaving Winifred as trustee of the testamentary trust. As David's death was prior to 31 March 2001, the remainder interest that would generally have been considered an asset of the trust and attributed to Winifred as the trust controller, will not be assessed as an asset of the trust and therefore not attributed to Winifred.

Act reference: SSAct section 1208E Attribution of assets, section 1118(1) Certain assets to be disregarded in calculating the value of a person's assets

Policy reference: SS Guide 4.12.3.30 Testamentary Trusts, 4.6.2.10 General provisions for exempt assets

Last reviewed: 6 February 2017